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Economy

Why Is Europe Balking at a Ban on Russian Energy?

Shocking pictures from the Ukrainian town of Bucha and accusations of Russian war crimes are building pressure for more sanctions against Moscow. A key potential target: Russian oil and natural gas, and the $850 million that European importers pay for those supplies every day.

But it’s not so easy, given Europe’s dependence on Russian energy.

Western sanctions so far have targeted Russian banks and companies but spared oil and gas payments — a U.S. concession to keep European allies on board and present a united front.

Here are key facts around Europe’s energy imports from Russia and whether a boycott is possible:

WHAT SUPPLY IS AT STAKE?

Europe gets 40% of its natural gas from Russia, which is used to heat homes, generate electricity and supply industry with both energy and a key raw material for products such as fertilizer.

For oil, it’s about 25%, most of which goes toward gasoline and diesel for vehicles. Russia supplies some 14% of diesel, S&P Global analysts said, and a cutoff could send already high prices for truck and tractor fuel through the roof.

WHY CAN’T EUROPE CUT OFF RUSSIAN ENERGY LIKE THE U.S. DID?

The United States imported little oil and no natural gas from Russia as it’s become a major producer and exporter of oil and gas thanks to fracking. Europe had some oil and gas deposits, but production has been declining, leaving the 27-country EU dependent on imports to fuel its advanced industrial economy.

Of the 155 billion cubic meters of gas that Europe imports from Russia every year, 140 billion comes through pipelines crossing Ukraine, Poland and under the Baltic Sea. Europe is scrambling to get additional supplies by ship in the form of liquefied natural gas, or LNG, but that still can’t make up entirely for losing Russian gas by pipeline.

LNG is also much more expensive, and suppliers are maxed out. And while some European countries are well-connected to LNG terminals, such as Spain, and new projects are in the works or soon to open in places like Greece and Poland, there isn’t the infrastructure to get those supplies to places that are heavily reliant on gas, from Germany to countries in Eastern Europe. Building new LNG import terminals and the pipelines to connect the gas to places that need it the most can take years.

Because reliance on Russia varies, agreement on an EU boycott is harder to achieve. Lithuania said it stopped Russian gas imports after building LNG import terminal that launched in 2014, and Poland, which has spent years looking for alternatives, says it will not renew a Russian gas contract at the end of this year on top of taking steps to ban Russian coal and oil.

Germany, the continent’s biggest economy, still gets 40% of its gas from Russia, even after cutting its reliance. It aims to end Russian coal imports this summer, oil imports by year end, and to be largely independent on gas by 2024, German Economy Minister Robert Habeck said.

WHERE ELSE COULD EUROPE GET ENERGY?

Europe is working to get off Russian gas as fast as it can over the next several years by finding new sources, conserving and accelerating wind and solar energy. The EU plan is to cut use of Russian gas by two-thirds by year and exit well before 2030.

Besides getting LNG from places like the United States and Qatar, Europe is pushing for more gas from non-Russian pipelines from Norway and Algeria.

Oil is different in that it mostly comes by ship. Still, it wouldn’t be easy to replace Russian supply with global markets tight. Taking Russia’s 2 million-plus barrels per day to Europe off the market would push oil prices higher worldwide. And Russia could try to sell the oil to India and China, though it might earn less.

WHAT WOULD HAPPEN IF EUROPE BANNED RUSSIAN ENERGY?

Estimates vary, but a cutoff implies a substantial hit to the economy. Oxford Economics estimates a six-month cutoff of Russian gas would lower economic output in the 19 countries that use the euro by 1.5%.

A ban might mean governments would have to ration gas among companies to protect homes and hospitals. Makers of metals, fertilizer, chemicals and glass would be hard hit. Even a partial shutoff of gas to industry could cost “hundreds of thousands” of jobs, said Michael Vassiliadis, head of Germany’s BCE union representing workers in the chemicals and mining industries.

“We will likely continue to see resistance from Germany and a select few others as they’re simply far more reliant on Russian imports of oil, gas and coal,” said Craig Erlam, senior markets analyst for the U.K., Europe, Middle East and Africa at currency broker Oanda. “Forecasts for the impact of an embargo vary, but it would almost certainly tip the country into recession.”

However, a group of economists including University of Notre Dame professor Ruediger Bachmann say an embargo would keep the economic costs to Germany below 3% of output, probably closer to 2%. While “these are substantial economic costs,” the economists said, they are “clearly manageable in the sense that the German economy has weathered deeper slumps in recent years and recovered quickly” — following the 2009 global financial crisis and coronavirus pandemic.

“Public fear-mongering about the catastrophic consequences of an energy embargo from lobby groups and affiliated think tanks does not hold up to academic standards,” they said in a report on the Centre for Economic Policy Research’s policy website.

WHAT ELSE COULD EUROPE DO BESIDES A CUTOFF?

Economists Simone Tagliapietra and Guntram Wolff at the Bruegel think tank in Brussels propose an EU import tariff on Russian oil and gas. That would reduce Russia’s revenue while avoiding a major hit to Europe’s growth, with the legal advantage of leaving contracts intact. European leaders last week insisted those same contracts protected them from Russia’s demand to pay for gas in rubles. The money from the tariff could be used to protect vulnerable households from higher energy prices.

While the army that invaded Ukraine is already paid for, the tariff would put the Kremlin in “a more difficult economic position, in which they might possibly start having difficulties buying stuff from the outside world, including armaments, and paying the salaries of the public sector,” Tagliapietra said. “All this will happen in months, but can have strong effects on the sustainability of Russian domestic politics.”

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